Housing demand has seen more than its fair share of softening of late as high home prices, rising mortgage interest rates and inflationary pressures have pushed affordability beyond budgetary reach for many buyers, especially first-timers.
According to First American Financial Corp., the median U.S. renter could afford only 35% of homes for sale in April, down from 54% one year earlier. But with many millennials aging into the prime homebuying window while Generation Z begins to accumulate its own capital resources for home purchases, First American identified the five best ‘oases of affordability’ for potential first-time buyers — the five cities where the median renter would find the largest supply of affordable homes to buy.
To find these cities, First American took the 50 largest markets in the U.S. and narrowed the list to cities where the median renter could afford at least 50% of homes for sale in April. Affordability was determined by using the median renter’s income, the 30-year fixed mortgage rate and the premise that one-third of a first-time buyer’s pretax income is used for a mortgage with a 5% downpayment.
This slashed the list to only nine cities and disqualified the country’s largest gateway cities such as Los Angeles, San Francisco and New York. Also not making the cut were several high-growth metros where home prices have risen steadily during the COVID-19 pandemic, including Phoenix, Las Vegas and Sacramento. In each of these six cities, less than 20% of homes were affordable to the median renter.
The city where the median renter could find the largest share of affordable homes was Buffalo, where 78% of homes for sale were within reach for the median renter. Next on the list were Pittsburgh (70%), Oklahoma City (62%), Detroit (61%) and Cincinnati (60%) — all large and landlocked cities in the Rust Belt or South regions where prices have seen comparably tepid price growth during the pandemic era.
First American economist Ksenia Potapov wrote on the company’s website that the list of cities that are friendly to first-time buyers may see some growth as demand cools further and the market gradually resets to more of an historic norm.
“Since April, mortgage rates have trended even higher, further reducing housebuying power and dampening demand,” Potapov said. “As the housing market cools, house-price growth is likely to moderate as potential buyers pull back from the market, allowing supply and demand to rebalance.
“But in the interim, cities such as Buffalo, Pittsburgh, Oklahoma City and Detroit provide renters the greatest opportunity to purchase a home.”